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The Department of Defense announced seven separate defense contracts Thursday, worth at least $293.1 million in total.
The largest of these new awards by dollar value went to a group of nine separate companies -- three of which are, according...

Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link. TheStreet Ratings quantitative algorithm...

WASHINGTON (dpa-AFX) - Tetra Tech, Inc. (TTEK) Wednesday reported
fourth-quarter net income of $22.6 million or $0.35 per share, down from $25.2
million or $0.39 per share last year.
Revenues, net of subcontractor costs, for the quarter dropped...

WASHINGTON (dpa-AFX) - Tetra Tech, Inc. (TTEK) Friday said it has been
awarded a $650 million multiple-award indefinite delivery indefinite quantity or
IDIQ contract by the U.S. Agency for International Development or USAID to
support the...

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Tetra Tech, Inc (NASDAQ: TTEK) is an engineering firm specializing in all things water: helping clients manage the use of natural sources and building the systems that deliver it to your home. The company provides services ranging from programs that help states better monitor and manage regional watersheds to design and construction of coastal water desalination plants to cleanup of contaminated groundwater around factories and military bases. In all, the company performed $1.28 billion worth of work in 2007 for government and commercial clients in the U.S. and abroad.[1]

The American Society for Civil Engineers estimates that the United States will need to spend 1.6 trillion dollars by 2012 to modernize the country's aging infrastructure, with much of this spending directed at the nation's dams, bridges and levees.[2] Additionally, for most of the 2000's many coastal states have had a crushing combination of record population growth and drought conditions, leaving their natural supply of fresh water nearly exhausted. [3] To ensure future water supplies, state and local governments have started investing in programs to better manage their existing water supplies, while simultaneously looking for new sources of fresh water--including the desalination of saltwater. All of these problems fall under Tetra Tech's core competencies and the company received more than half of its total revenue in 2007 from projects of these types.[4] Higher future demand for these services generates the potential for more business and higher earnings for the company.

In 2007, 64.1% of TTEK's revenues came from Federal, State, and Local governments [5] and this exposure puts the company at a higher risk than many of its competitors from changes in yearly government budgets. This exposure can sometimes prove detrimental because government contracts often require substantial initial investment, but can be stalled or canceled at any time if congress cuts funding for the project. While Tetra Tech has traditionally focused on US operations--only 0.3% of total revenues came from international clients in 2005[5]--its acquisition of ARD, Inc in 2007 marks a shift towards a more global perspective. In 2007, nearly 1% of all revenues came from international clients such as the United Nations, and that percentage is expected to grow further in coming years.[5]

Business Segments

Tetra Tech divides its operations into three broad business segments: Resource Management, Infrastructure and Communications.

Resource Management (63.1% of 2007 revenues, net subcontractor costs; 64% of 2007 operating income)[6][7] provides evaluation and engineering services for water management, waste management and environmental remediation projects. Working primarily with federal agencies such as the Department of Energy, Department of Defense and the EPA, as well as state and local governments, the business segment helps develop systems to effectively manage water distribution, analyzes and certifies groundwater for human consumption, provides design and construction support for hazardous waste cleanup sites, and helps reconstruct native environmental conditions around closing military bases under the US Base Realignment and Closure (BRAC) Act, just to name a few. Revenue for this segment grew by 6.3%[8] in 2007, buoyed mostly by increased spending on alternative energy studies and water management efforts by state and local governments.

TTEK's Infrastructure segment (32.6% of 2007 revenues, net subcontractor costs; 32.1% of 2007 operating income)[6][7] focuses mainly on water-related infrastructure projects analyzing, designing and constructing sewers, and wastewater treatment plants as well as water desalination plants and drinking water delivery systems. Infrastructure also provides architectural and construction management services for road and bridge projects. In addition this segment provides technology systems integration and analysis to the U.S. Federal Aviation Administration as the agency moves from ground-based to satellite-based navigation systems for commercial aviation. The segment's revenues, net subcontractor costs, grew by 5.2% due mostly to new work performed for the Department of Defense.[9]

Communications (4.3% of 2007 revenues, net subcontractor costs; 3.9% of 2007 operating income)[6][7] represents a diminishing share of the company's total services, especially since Tetra Tech left the wireless communications business in 2006. What remains of the segment provides engineering, permitting, site selection, and construction management services for wired communications systems. The segments key client's include state and local governments, telecommunications companies and cable operators. Communications' revenues grew by only 0.6% in 2007 mainly from increased local government funding for fiber optics systems.[9]

Operating Income by Business Segment

Clients

Federal, State and Local Government agencies in the United States accounted for a full 64.1% of Tetra Tech's revenues in 2007. Corporate clients in the US represented an additional 35%, leaving 0.9% from all clients outside of the United States. [5] The company is looking to expand its international business with its 2007 acquisition of ARD, Inc, a company managing significant international projects for the United Nations, the US Agency for International Development (USAID), and foreign government aid organizations.

Revenues, net of subcontractor costs

Backlog

At the end of FY 2007, Tetra Tech reported a contract backlog worth $1.3 Billion dollars. This represented a 19.8% increase from the end of FY 2006, a rise due mostly to increased funding for reconstruction contracts with the Department of Defense in Iraq.[10] The company expects to complete $900 million worth of the work in this backlog in FY 2008.[11]

Trends and Forces

Population Growth/Drought Combination Increases Demand for TTEK's Core Services in US

For most of the 2000's, states in the West, Southwest, and Southeast regions of the United States have encountered water shortages as a result of population growth and drought conditions often attributed to global warming. In Florida, residents used about 2.4 trillion gallons of fresh water in 2007, all but exhausting the state's natural supplies. By 2025, however, Florida's population is expected to grow by 24% and its water demand is expected to hit 3.3 trillion gallons per year. [3] Similarly in California, drought conditions and shrinking snowpack in the Sierra Nevada mountains are decreasing water supplies, just as the state's population is expected to grow by nearly 3 percent from 2007 to 2010.[12] To span the rising gap between the demand for fresh water and natural supplies, states will need to turn to the types of services that Tetra Tech offers: improved watershed management programs and efficiency studies to reduce demand as well as desalination/water purification plant construction to increase supplies. In 2007, Tetra Tech performed more than 715 million dollars worth of engineering, design, and construction services for water purification and delivery services. [4] Those services accounted for nearly half of TTEK's total revenue in 2007. Sustained water shortages would have a significant positive effect on the company's earnings.

Aging US Water Infrastructure Contributes to Future Demand for Hydro-Engineering Services

In November 2007, the United States Congress passed into law the Water Resources Development Act (WRPA) which appropriated $23 Billion for water-related infrastructure programs.[13] Passage of this bill marks the first step in what the American Society of Civil Engineers $1.6 trillion worth of work that is needed to modernize American infrastructure. [2] With 32% of TTEK's operating income coming from Infrastructure projects and the company's focus on federal projects, the company stands to gain significantly from WRPA as well as from increased government infrastructure spending in the future.

Heavy Reliance on Government Contracts Leads to Uncertainty

With a full 43.9% of net revenues coming from the Federal Government in 2007, Tetra Tech is much more exposed to congressional volatility than its competitors. (By comparison, both Jacobs Engineering and CH2M Hill--serious competitors in Tetra Tech's environmental and infrastructure markets--receive less than 30% of their annual revenue from government contracts.)[14][15] Most government contracts are subject to periodic approval and can be canceled at any time if congress does not budget for the project. The US Budget can vary greatly from year to year depending on tax revenues, the party in power, military realities, and public perception of a given issue. While WRPA demonstrated that congress favored infrastructure improvements in 2007, that favor can disappear quickly, leaving Tetra Tech with significant capital investments in stalled projects.